Daejeon District Court 2012Guhap2391 (2014.09)

Based on determining the economic rationality of wrongful calculation, the transaction price between non-specially related persons, special circumstances at the time of transaction, etc. shall be considered in addition to social norms and commercial practices.

Whether a transaction constitutes wrongful calculation should be determined based on whether the transaction act lacks economic rationality in light of sound social norms or commercial practices, taking into account all the circumstances of the transaction act. Based on the determination of economic rationality, the transaction price between non-specially related persons in addition to social norms, commercial practices, and special circumstances at the time of the transaction should also be considered.

2014Nu210 Revocation of Disposition of Corporate Tax Imposition

AA Business Corporation

The Director of the National Tax Service

Daejeon District Court Decision 2012Guhap2391 Decided April 9, 2014

June 19, 2014

July 3, 2014

1. The defendant's appeal is dismissed.

2. The costs of appeal shall be borne by the Defendant.

Claim: The defendant's disposition of imposition of the corporate tax on March 30, 201 to the plaintiff on March 30, 201, which exceeds the OOO personnel, shall be revoked.

The purport of appeal: Revocation of the judgment of the first instance. The plaintiff's claim is dismissed.

1. Details of the disposition;

A. BB Construction Co., Ltd. (hereinafter referred to as “B Construction”) entered into a transaction performance agreement (hereinafter referred to as “instant agreement”) with CCC Life Insurance Stock Co., Ltd. (hereinafter referred to as “CC Life”) and DD Unemployment Co., Ltd. on June 23, 199 regarding BB Construction’s capital increase with respect to BB Construction’s capital increase.” and Article 1 (Transaction Terms)

1)CC bio-resources purchase BB construction stocks at the request of BB construction within the scope of OO by a person designated byCC bio-resources or by a person designated byCC (OO).

2) BB construction purchases OOOO in the purchase price of the shares under paragraph 1 of the above paragraph on the following day from the following day, and OOOO shall purchase OOOOOO in the increase of theCC life through DD unemployment or in the issuance price (OOO per share) in accordance with the needs of theCC life.

Article 2 (Maintenance and Termination of Transactions)

1) Pursuant to Article 1, the shares acquired byCC bio-resources and DD unemployment will be held for a period of two years, and may be extended by two years through mutual consultation, and the commencement of the agreed period of the transaction will be from the date of purchase of the shares ofCC bio-resources in Article 1(1).

3) In principle, the OOO of the BB construction shares acquired by the side of theCC bio-resources shall be sold in the stock market above the purchase price during the holding period.

4) When the CC bio-resources sell BB construction stocks, the EE EE Tech insurance for the amount equivalent to the purchase price of the stocks shall be cancelled and the mutual profit and loss shall be settled.

5) Notwithstanding the provisions of paragraphs 1 through 4 above, if any of the following events occurs toCC and BB Construction during the period of this transaction, notification by either of the decision ofCC bio-resources or BB Construction may be made and terminated.

(a) When he/she is subject to the disposition of suspension of transactions or becomes insolvent;

(b) Where business is suspended or business is canceled;

(c) Where an application for commencement of company reorganization, bankruptcy, composition or equivalent procedure is filed, a resolution of dissolution at a general meeting of stockholders, a dissolution order or dissolution ruling by the court or any other supervisory authority is requested, or liquidation procedures commence; and

7) In the event of termination of this Agreement pursuant to paragraphs 1 and 5 of Article 2, the shares of the BB construction held by theCC will be sold through the market or redeemed by a third party designated by BB Construction or BB Construction, and the shares of theCC bio-resources held by the DD unemployment will be redeemed at par value by a third party designated by theCC bio-resources upon request of theCC bio-resources.

Article 3 (Settlement of Profit and Loss and Compensation)

When this Agreement is terminated pursuant to paragraphs 1 and 5 of Article II, theCC shall settle profits and losses to BB Construction as follows:

1) At the time of occurrence of profit from sale: (a) cancellation value on the date of cancellation + (trade profit - stock transaction tax and sales expense) x 80% - (the cancellation refund in excess of the fixed payment insurance premium + commission 3% on the basis of the purchase price of the BB stocks of theCC life in paragraph 1 of Article 1) - Financial costs set forth.

2) At the time of occurrence of a sale loss: the cancellation refund on the date of cancellation - (trade loss + stock transaction tax and sales expense) - (the cancellation refund in excess of the fixed payment premium + commission 3% based on the purchase price of CB construction stocks ofCC life in paragraph 1 of Article 1) - the prescribed financial costs

"5) If it is impracticable forCC to sell BB construction stocks,CC bio-resources shall settle the loss portion ofCC bio-resources at the cancellation refund with the market price of BB construction as zero, andCC bio-resources shall deliver shares of BB construction held by BB construction or BB construction to a person designated by BB construction or B construction."

CC bio-resources and DD Unemployment shall delegate all the powers of each company to acquire as shareholders such as voting rights and dividend rights for each company's shares to BB Construction andCC bio-resources.

B. BB Construction issued capital increase with the third party under the instant agreement on June 23, 1999, andCC acquired 2 million won of new shares issued with the capital increase (OO won per share) in total.

However, as the BB Construction's share price continuously drop on December 30, 199,CC demanded BB Construction to acquire shares as soon as the agreed holding period. BB Construction acquired 1,671,930 shares fromCC (hereinafter referred to as the "transaction in this case"). C. The Plaintiff acquired 1,671,930 shares of the above company while absorbing and consolidating BB construction on October 11, 2004, 1,671,930 shares acquired 1,671,930 shares of the above 300 shares, 1,361,930 shares of the above 1,930 shares, and 30 O shares of the above 1,670 shares, and 1,883 shares of the above 30 O shares of the Plaintiff as the acquisition price of the shares of the 1,671,930 shares x 1,000 shares of the above 1,000 shares of the 190 O shares.

E. On June 27, 2011, the Plaintiff appealed to the Tax Tribunal, but the Tax Tribunal dismissed the Plaintiff’s request on March 5, 2012.

[Ground of recognition] Facts without dispute, Gap evidence 1, 2, Gap evidence 4-1, 2, Gap evidence 5, the purport of the whole pleadings in Gap evidence 1

2. Whether the instant disposition is lawful

A. The parties' assertion

1) The plaintiff's assertion

(A) According to Article 41(1)1 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the “Corporate Tax Act”) and Article 72(1)1 of the Enforcement Decree of the same Act (amended by Presidential Decree No. 19328, Feb. 9, 2006), the acquisition value of assets purchased from others is the amount calculated by adding acquisition tax, registration tax, and other incidental expenses to the purchase price. BB construction does not constitute an amount of money calculated by adding the acquisition tax, registration tax, and other incidental expenses to the purchase price. In light of the fact that BB construction purchased 90,000,000, including the 1,671,930,000,000,0000,0000,0000,0000,0000,000,0000,000,000,000,000,0000 won).

C) Therefore, the acquisition value of the instant stocks shall be KRW OO per share. Of the instant dispositions, the part in excess of KRW OO (=OO - OO x 25% of the principal corporate tax on KRW 2005 included in the Defendant’s gross income (=tax base OO x corporate tax rate 25%) + OO x 30% of the additional tax on negligent tax returns (i.e., principal tax x illegal underreporting x 30% of the additional tax on negligent tax) x O O x an additional tax on negligent tax payment (=0.03% of the principal tax on KRW 1,825)) should be revoked as unlawful.

2) The defendant's assertion

A) The primary argument

Pursuant to Article 52(2) of the Corporate Tax Act and Article 87(1)2 of the Enforcement Decree of the Corporate Tax Act, “CC” does not exercise the right to put options as stipulated in the instant agreement, but rather entered into a separate contract with BB Construction andCC life. Accordingly, “CC life” as a shareholder of BB Construction at the time of the instant transaction constitutes a specially related party as stipulated in Article 52(1) of the Corporate Tax Act and Article 87(1)2 of the Enforcement Decree of the Corporate Tax Act. Therefore, the acquisition of the instant outstanding shares by BB Construction constitutes acquisition value per share, the closing price of the instant outstanding shares at the time of the instant transaction, as a transaction between the specially related parties. The excess is not included

(1) A claim that the refund upon cancellation constitutes a refund upon cancellation.

"CC life and BB construction at the time of the agreement of this case where it is not possible forCC to sell BB construction stocks at the time of the agreement of this case,CC life settled the loss portion ofCC life at cancellation refund with the market price of BB construction 0.CC life agreed to deliver the stocks of BB construction held by BB construction or B B construction to the person designated by BB construction (Article 3(5)).CC life requested BB construction to acquire the stocks of this case as soon as the initial holding period was impossible to sell the stocks through the market due to a continuous decline in the stock price of BB construction. BB construction also paid cancellation refund upon cancellation of the agreement of this case in order to reduce losses. Accordingly, the acquisition price of the stocks of this case at the time of the transaction of this case should be deemed as the acquisition price of the OO value per stock, which is the closing price of the stocks at the time of the transaction of this case, and the portion exceeding the above acquisition price is not included in the cancellation refund and distribution agreement."

The instant agreement, rather than a simple put option agreement, is not a put option agreement, but in cases where profits accrue from disposing of the BB construction stocks at higher prices than the market price, the remaining profits after deducting expenses are divided into BB construction andCC life by 80% and 20%. If losses occur as a result of disposing of the price lower than the acquisition price, the investment profit and loss distribution agreement is made inasmuch as the agreement is made to pay the sum of all the expenses incurred when losses occur as the acquisition price is disposed of. Therefore, the BB construction paid toCC on December 30, 199, shall be deemed as the investment profit and loss distribution agreement. Accordingly, the amount exceeding the acquisition price shall not be included in the portion as the acquisition price.

(3) The assertion that such transaction constitutes a secured loan transaction.

The instant agreement aims to raise funds through capital increase by financial investors in order to lower the debt ratio, and it constitutes a collateral loan transaction as collateral, inasmuch as BB construction trades funds to raise funds through the offering of new stocks by offering new stocks by the financial investors, and it actually mediates stocks fromCC bio-resources, and thus, constitutes a collateral loan transaction. Therefore, the acquisition value per share, the closing price of outstanding stocks at the time of the instant transaction, shall be deemed as the acquisition value, and the excess portion shall not be included in the acquisition value as interest expenses for the interests for the fixed period interest of the OO members paid byCC bio-resources.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

(c) Fact of recognition;

1) Under the IMF management system at the end of the 1990s, the government recommended the companies to maintain the debt ratio compared to the equity capital below 200%, and the financial institutions also refused to extend the maturity as well as the repayment pressure of the loans if they fall short of such standard ratio.

2) As of the end of March 199, 199, BB construction entered into a crisis in the management of funds if the debt ratio reaches 338.3% as of the end of the pertinent 338.3% prior to the capital increase, and thus, it was difficult to find investors to participate in BB construction’ large-scale capital increase, which is an insolvent company with the debt ratio exceeding 338.3%, even though the government attempted to provide capital increase to meet 200% of the recommended debt ratio, it was difficult to find investors to participate in BB construction’s large-scale capital increase. Meanwhile, the life ratio at that time was at a crisis where the paid-in ratio was lower due to cumulative deficit for 7 to 8 years, and the method of preventing this was only to increase the capital by expanding the capital or increasing the capital increase.

3) On June 23, 1996, BB construction entered into the instant agreement withCC bio-resources with the condition thatCC bio-resources participate in BB construction’s capital increase with capital increase. Around June 30, 2001, if the share price per share does not reach the OO capital, BB construction acquired the shares of BB construction to the OO capital and paid 3% of the total amount as commission, i.e., the condition that it has practical put options to put in place.

4) Pursuant to the instant agreement, BB construction conducted capital increase with 2 million common shares registered on June 23, 1999, and completed the registration of capital change on June 24, 199. OOOO was deposited in BB construction on June 23, 1999, and BB construction purchased PCC life insurance as originally agreed on June 24, 199, and paid OOOOO as its insurance premium, and the remaining OOOOOOO was revoked for the purpose of operating funds.

"5) Under the provision related to the insurance business since it had not been able to participate directly in the capital increase issued by the KOSDAQ-listed company at the time of capital increase. Accordingly, on June 23, 199, the FF-invested Investment Company (hereinafter referred to as the "F-invested") purchased BB construction shares under the instant agreement, and CC life support fund for 30 days with short-term recovery fund (call loan), and on the expiration date, CC purchased 2 million won from the above 200,000 won which it acquired from BB construction; on the other hand, 200,000 won which it acquired from the above 200,000 won which it borrowed from the above 97,000 won which it directly acquired from the above 97,000 won from the above 97,000 PH Investment Fund (hereinafter referred to as 97,000,000 won which it acquired from the above 209,000 won.

8) After that, “CC bio-resources is likely to deteriorate the debt ratio of HHbe, and as the share price of BB construction falls in a continuous large width, the request for acquisition of shares was made on December 30, 199 to BB Construction as soon as the initial period of possession was earlier than the initial period of possession, and as the share price continuously drops, BB Construction would accept the request for acquisition ofCC bio-resources to reduce cumulative losses incurred when maintaining the instant agreement as it is. Accordingly, 1,671,930 out of 2,000 shares acquired by CCC bio-resources (HHHV) and BB construction would repurchase BB in the form of purchasing the acquisition price in the form of purchase of BB construction shares of 2,00,000 won outside of the head office, but BB construction would offset the loan claim of the above PHV construction with the loan claim of the above PHA claim.

[Ground of recognition] Facts without dispute, Gap evidence 3, Gap evidence 4-1, 2, Gap evidence 5, Gap evidence 8-1 through 15, the purport of the whole pleadings

D. Determination

1) Acquisition value of the instant shares

Whether BB Construction paid in relation to the acquisition of its own stocks as the price for the acquisition of its own stocks, or whether the remaining amount is paid as the price for the acquisition of its own stocks, etc. is the issue of interpretation of legal act, and should be determined on the basis of the substance of the transaction and the intent of the parties. However, in the calculation of taxable income for corporate tax in light of the substance over form principle, the determination of taxation subject to specific tax law should be made on the basis of the substance of the transaction, such as the content and form of the transaction concerned, regardless of the content, account title, and transaction name of the pertinent corporation, the contents and form of the contract concerned, as well as the process of concluding the contract, the method of payment, and the progress of the transaction (see Supreme Court Decision 90Nu

Article 41(1)1 of the Corporate Tax Act provides that the acquisition value of assets purchased from a third person shall be the amount calculated by adding acquisition tax, registration tax, and other incidental expenses to the purchase value. It is reasonable to deem that the outstanding stocks acquired by BB construction constitutes a transaction of profit and loss of assets subject to taxation because it is not the treasury stocks acquired for retirement, but the stocks temporarily owned under the premise of disposal. Thus, the acquisition value of assets should be calculated by adding incidental expenses to the purchase value according to the Corporate Tax Act. (2) Under Article 41(1)1 of the Corporate Tax Act, if the price of stocks acquired at the time of the instant agreement falls below the acquisition price of stocks at the time of the instant agreement, it is difficult to determine the acquisition price of stocks at the time of the instant agreement as the acquisition price of stocks at the time of the instant agreement, even if the purchase price of stocks falls below the acquisition price of the stocks at the time of the instant agreement. (3) Article 72(1)1 of the Enforcement Decree of the Corporate Tax Act provides that the purchase price of the stocks at the instant time of the instant agreement was calculated as the acquisition price of stocks at the instant case.

2) Determination on the Defendant’s assertion of denial of wrongful calculation

A) The denial of wrongful calculation under Article 52 of the Corporate Tax Act shall be limited to cases where a transaction by a person in a special relationship with a corporation falls under any subparagraph of Article 88(1) of the Enforcement Decree of the Corporate Tax Act. It shall not be permitted to analogical interpretation or expanded interpretation under the principle of no taxation without law. In addition, in order to be deemed a wrongful calculation, it shall be deemed that the act was intended to unfairly avoid or reduce the tax burden by abusing all the forms of transaction listed in each subparagraph of Article 88(1) of the Enforcement Decree of the Corporate Tax Act, or where it is recognized that, without such intent, it neglected the economic rationality by calculating natural and unreasonable acts in an economic person’s way (see, e.g., Supreme Court Decision 89Nu8095, May 11, 190). Furthermore, whether a certain act constitutes wrongful calculation should be determined by taking into account the overall circumstances of the transaction act in light of sound social norms and commercial practice at the time of the transaction (see, e.g., Supreme Court Decision 2008Nu678, May 1978).

B) WhetherCC life constitutes a specially related person

Article 2(1) of the former Act provides that “If an agreement is concluded upon the purchase of assets at a higher price than market price, the acquisition of assets constitutes wrongful calculation at the time of the transaction, and if the timing and timing of transfer are different, it shall be determined as at the time of transaction (see, e.g., Supreme Court Decision 2007Du14978, May 14, 2010).” Article 2(1) of the former Act provides that “If the agreement is concluded, it shall be deemed that the agreement is unfair to exercise put to put to place orders or put options, it shall be deemed that the agreement is deemed that the acquisition of stocks at a lower price than market price.” (see, e.g., Supreme Court Decision 2010Du1484, May 27, 2010) is difficult to determine whether the agreement is held until the lapse of 20 years prior to the expiration of the agreement.” (see, e., Supreme Court Decision 2010Du1484, supra.).

Therefore, in the instant transaction,CC’s total issued stocks of BB Construction (Evidence No. 8-14) held 23.1% of 23.1% of the total issued stocks of BB Construction (Evidence No. 8-14) and thereby,CC’s life constitutes a specially related person as stipulated in Article 87(1)2 of the Enforcement Decree of the Corporate Tax Act with respect to BB Construction.

B) Whether there is an economic rationality

6. As to the Plaintiff’s shares issued and sold to the Plaintiff, it is difficult to accept the Plaintiff’s shares issued and sold to the Plaintiff at the time of the Plaintiff’s purchase and sale of the Plaintiff’s shares, and the Plaintiff’s shares issued and sold to the Plaintiff at the time of the Plaintiff’s purchase and sale of the Plaintiff’s 200% or less of the Plaintiff’s shares issued and sold to the Plaintiff. However, it is difficult to find investors to participate in the Plaintiff’s purchase and sale of the Plaintiff’s shares at the time of the Plaintiff’s purchase and sale of the Plaintiff’s shares. However, it is difficult to view the Plaintiff’s purchase and sale of the Plaintiff’s shares at the time of the Plaintiff’s purchase and sale of the Plaintiff’s shares at the time of the Plaintiff’s purchase and sale of the Plaintiff’s shares at the time of the Plaintiff’s purchase and sale of the Plaintiff’s shares at the time of the 190s.

Therefore, the Defendant’s assertion that the acquisition value of the instant stocks is an OOO won per share on the premise that the instant transaction constitutes a wrongful calculation is without merit.

3) Determination on the defendant's assertion that the cancellation refund constitutes the cancellation refund

In light of the following circumstances revealed in the above facts, namely, the cancellation refund is the amount refunded to the contractor in the event of loss of effect, cancellation, and cancellation of the insurance contract, and the cancellation refund under the contract of this case seems to refer to the amount received fromCC life when the contract of this case is terminated, and it does not seem that BB construction has reduced in the stock price of BB construction, or that it is not impossible to sell BB construction’s stocks. In full view of the following circumstances such as the agreement between BB construction andCC life at the time of the transaction of this case and there is no evidence to acknowledge that BB construction agreed to the contract of this case, and that there was no evidence to prove that BB construction agreed to settle the loss portion ofCC life with the cancellation refund, it is difficult to view that BB construction was a refund for cancellation of the contract of this case.

4) Determination on the defendant's assertion that the agreement on distribution of profits and losses constitutes an investment agreement

On the other hand, the following circumstances revealed in the facts of the above recognition, namely, BB construction, whose debt ratio was 338.3% at the time of the agreement of this case, was planned to increase shares to lower the debt ratio below 200%, and thus, it seems that it would have not concluded an investment profit distribution agreement via the offering of new shares. Since IMF at the time of this case’s offering of new shares is clearly anticipated to decrease in the price, BB construction, which is well aware of the price of new shares, bears all damages when the price falls below the issue price, and it is difficult to conclude an investment profit distribution agreement that is unilaterally unfavorable to BB construction for the purpose of distributing 80% of profits at the time of the price increase. Since BB construction is unfavorable to BB construction, it is difficult to consider that BB construction would have not concluded an investment profit distribution agreement with BB construction for the purpose of distributing 80% of profits and losses to BB construction at the time of the price increase, it is difficult to see that BB construction would have not agreed to pay part of the above 90 PCC’s.

5) Determination as to the Defendant’s assertion that such transaction constitutes collateral loan transactions

In light of the following circumstances revealed in the facts of the above recognition, namely, the shares were actually issued due to the issue of capital increase, and the shares issued were accepted in FF2 and HH2, etc. The main purpose of the capital increase for capital increase was to lower the debt ratio to less than 200%, as well as BB construction paid out of the amount of capital increase for capital increase received fromCC as insurance premium for bio-resources. The remaining OOOO is agreed to be invested in the capital increase for bio-resources, and it seems that BB construction did not have any funds actually accrued from the standpoint of BB construction. Even if CB construction delegated all rights of shareholders, such as voting rights and claim for dividend, to BB construction, under Article 2(3) of the Agreement, it is difficult to view that BB construction agreement could not be sold out of the shares of BB construction to the third party for the reason that BB construction agreement could not be seen as a comprehensive consideration between BB construction and the third party.

6) Sub-decisions

Therefore, the acquisition value of 1,671,930 shares acquired by BB Construction from the side ofCC life is an OOO, and the acquisition value of the shares at issue calculated based on it is an OOOO (x 1,361,883 shares per share). Since there is no profit gained by the Plaintiff in disposing of the shares at issue in the OO, there is no profit gained by the Plaintiff in disposing of the shares at issue, the part exceeding the OOO's capital should be revoked as claimed by the Plaintiff among the dispositions at this case by the Defendant on the premise that the Plaintiff obtained the transfer margin of OO's capital by disposing of the shares at issue, as claimed by the Plaintiff.

3. Conclusion

Therefore, the plaintiff's claim shall be accepted on the grounds of its reasoning, and the judgment of the court of first instance is just, and the defendant's appeal is dismissed as it is without merit. It is so decided as per Disposition.